Enron & Tyco Case Studies

Of these transactions, most of it was not in the interest of Enron of Enron’s shareholders; such as profits and cash flows were manipulated and grossly inflated which caused misleading to the investors. AA has also failed to recognise the Generally Accepted Accounting Principle (GAAP) – which is accounting rules used to prepare, present and report financial statements for a wide variety of entities used in United States. AA also did not advise Enron’s audit committee that Enron’s CFO – Andrew Fastow – and his helpers were involved in significant conflict of interests. Enron’s politics and internal control was also found out to be inadequate to protect the shareholders interests. These should have made known and clear as these are responsibilities of an auditor. AA has also make the mistake by which it did not act upon evidence found or neither has it find any audit evidence relating to the numerous share rights transferred to SPEs and the side deals between Enron and banks which remove the banks’ risk from transactions. In auditing, audit documentations are key part to the audit processes.

This event was unprecedented. The seventh largest company in the United States disintegrated from an annually profitable company in business for over sixteen years to a company claiming to be bankrupt over a period of a few months (O’Leary). Ultimately, fraudulent accounting and misstatements of revenues and debt obligations orchestrated by the CEO, CFO, and other senior managers were to blame. These revelations roiled stakeholder trust in public companies' financial reporting, accounting methodology, and overall transparency. In addition to Enron’s admissions, their accountant and auditor, Arthur Andersen LLP, was determined to have conspired to assist in the inflation of stated profits mainly by not disclosing Enron's money-losing partnerships in the financial statements (PBS). Arthur Andersen eventually surrendered the practices’ CPA licenses in the United States after being found guilty of criminal charges relating to the firm's handling of auditing for Enron

Enron’s fraudulent financial practices lead to the Sarbanes Oxley Act of 2002. Mistakes made by the company and their leadership shocked the world and cost billions. Enron’s leadership could have taken steps to prevent or mitigate the repercussions of their actions. The act restored ethical and reliable financial practices to the market.The major provisions of the act made corporations responsibility for financial reports, and required internal and external audits. The Act changed the accounting regulatory environment. And although corporations incurred the additional expense of audit and new reporting standards, these changes restored consumer investing confidence, strengthening the corporations and the stock market overall. (Flanigan, 2002.)

Enron Corporation was an American energy trading company who committed the largest audit fraud alongside Arthur Andersen and filed for one of the largest bankruptcies in history in 2001 after producing false numbers and committing fraud for years (“Enron’s Questionable Transactions” page 93). Enron failed to run an ethical business in multiple aspects. The executives of the company abused their powers by having board members not properly oversee its employees. Enron committed accounting malpractice by producing false financial reports to hide the debt from failed projects and deals. Using a mark-to-market accounting method, Enron would create assets and claim the projected profit for the books immediately even if the company had not made any profit yet. In order to hide its failures, rather than reporting their loss, they would transfer the loss to an off-the-books account, ultimately leading the loss to go unreported. Along with Enron hiding losses and creating false profit for the

“Kenny Boy” did not serve as a useful foil or overseer of his own CEO actions, as a good independent Chair of the Board should. The inherent conflict of interest in being CEO and Chair has led to increasing separation of these functions as a measure of good governance, and some jurisdictions are requiring it. For example, Lay’s handling of the Sherron Watkins whistle-blowing letter showed either brilliance or evidence of incompetence on conflict of interest matters. He asked the lawyers who advised on the creation of the SPEs if what they had done was all right.

They created an environment and had the departments and individuals competing with each other. Employees and divisions were constantly under pressure to deliver the required results, at times at each others' expense. Since a person's job was at risk if he didn't deliver, there was often the temptation to lie and deceive in order to meet the requirements and stay employed. Since all of this flowed down from, and then bubbled back up to the very top of the company to the executives who had set expectations with investors, the same temptations and the same behaviors existed at all levels within the company. Each department within the company had firm financial goals to meet. Whenever possible, individuals had specific financial goals. This behavior created a culture of selfishness, greed, and "results at all costs." In the end, it bred lies and deception. This culture resulted in the massive accounting fraud that has been uncovered. (Sarno)

As noted in the above context, the board of directors followed instructions from the top. They did what Dick Fuld told them even though it was not appropriate. The company was failing in its operations even with availability of the Risk Management Department. The board of directors knew the irrational nature of the markets but was ignored by Dick Fuld. This reflects the lack of corporate governance in reference with the operational risks that were evident in Lehman. In addition, Dick Fuld was stopped at noting in his efforts to keep the stock price high. The duty of the Lehman’s board was to sign off the decisions that were made by the CEO. The CEO and the chairman were one in the same. Fuld chaired majority of the committees and his enabled his preferences to be considered.

Many are probably familiar with what has become one of America’s horror stories. It is a story about the American dream and promise gone amuck. The conclusion of the story is one that has shaped the way businesses operate ever since. The documentary Enron: The Smartest Guys in the Room (Gibney, 2005) examines the ethical blunders of the natural gas/energy company Enron. Alex Gibney (2005), director and producer for the documentary, focuses on the role of three men who were credited as being key players in the downfall of the company. The three men were Chief Executive Officer (CEO) Jeff Skilling, Founder and Chairman Ken Lay, and Chief Financial Officer (CFO) Andy Fastow. Gibney (2005) proceeds to outline the gradually rise of Enron, the

Another one of the major mistakes that were made was that Enron’s auditor was filled with conflict of interest. Because of

Q 1: Evaluate Enron profit and cash flow performance during the period 1998 – 2000?

All the above issues that led to the bankruptcy of the company were perpetuated by the actions of Lay, Skilling, Fastow and other executives. They all led to the collapse of the company. Lay did not enquire about the decisions that Skilling and Fastow were taking. He just approved to everything that they kept in front of him. Skilling always wanted to keep up to the Wall Street expectations and for this he gave pressure on his executives to find new was to hide the dept. This was the major setback for the company as they didn’t know that in future everything was going to come out and it would have led to bad consequences. Lay did not enquire about all this and approved of all the work Skilling was doing.

1- Encouraging employees to invest and buy stock in Enron when they knew the truth about the lack of value in the stock.

As competition increased and the economy started to plunge in the early 2000s, Enron struggled to maintain their profit margins. Executives determined that in order to keep their debt ratio low, they would need to transfer debt from their balance sheet. “Reducing hard assets while earning increasing paper profits served to increase Enron’s return on assets (ROA) and reduce its debt-to-total-assets ratio, making the company more attractive to credit rating agencies and investors” (Thomas, 2002). Executives developed Structured Financing and Special Purpose Entities (SPE), which they used to transfer the majority of Enron’s debt to the SPEs. Enron also failed to appropriately disclose information regarding the related party transactions in the notes to the financial statements.Andersen performed audit work for Enron and rendered an unqualified opinion of their financial statements while this activity occurred. The seriousness and amount of misstatement has led some to believe that Andersen must have known what was going on inside Enron, but decided to overlook it. Assets and equities were overstated by over $1.2 billion, which can clearly be considered a material amount (Cunningham & Harris, 2006). These are a few of several practices that spiraled out of control in an effort to meet forecasted quarterly earnings. As competition grew against the energy giant and their

Needed for the Houston office of Andersen, an audit partner that understands the role of being a "public watchdog" with "ultimate allegiance to the creditors and shareholders" . Arthur Anderson abandoned its roles as independent auditor by turning a blind eye to improper accounting, including the failure to consolidate, failure of Enron to make $51million in proposed adjustments in 1997, and failure to adequately disclose the nature of transactions with subsidiaries . Another example is Lord Wakeham joined Enron as a non-executive director in 1994 and also sat on Enron's audit and compliance committee. In addition, Andersen also provides internal audit service to Enron, which in fact impact

Most of the world has heard of Enron, the American, mega-energy company that “cooked their books” ( ) and cost their investors billions of dollars in lost earnings and retirement funds. While much of the controversy surrounding the Enron scandal focused on the losses of investors, unethical practices of executives and questionable accounting tactics, there were many others within close proximity to the turmoil. It begs the question- who was really at fault and what has been done to prevent it from happening again?